This Euro-Trashed Rival Has GE Beat

01/11/2011 1:04 pm EST


Richard Band

Editor, Profitable Investing

Europe’s debt crisis has left Philips Electronics cheaper than General Electric despite superior performance, writes Richard Band in Profitable Investing.

Hey, I’ve got news for you. Despite all the hoo-hah about the death of the American economy, US stocks—in dollar terms—outran most foreign bourses in 2010. In fact, since May 2008, a $10,000 portfolio of stocks invested in the Standard & Poor’s 500 index would be worth almost 19% more (ignoring dividends) than a portfolio invested in the other developed nations of the world.

So why even bother to diversify overseas? Paradoxically, now may be among the best of times to spread your wings beyond our borders, for three reasons:

• Many businesses in the developed countries of the “old world” are selling more cheaply in their local stock markets than peers domiciled in the United States—despite equal or superior management quality and growth prospects.

• Although the dollar has traded in an erratically rising pattern since mid-2008, the longer-term trend (dating back to 1971) points downward. For a US investor, a falling dollar pushes up foreign stock prices in dollar terms.

• Emerging markets are growing much faster than their developed counterparts. In 2010, China’s real (inflation-adjusted) GDP grew about 10%, India’s about 8%, and Brazil’s about 7%. The United States, by contrast, is estimated to have grown less than 3%, and the European Union less than 2%. Clearly, there’s huge growth potential for investors to tap into—as long as we place our bets in the right countries at the right price.

In the developed world, I’m finding the best values right now in Europe, where the debt woes of the so-called “peripheral” countries (Greece, Ireland, Portugal, Spain) have once again hammered the euro in recent weeks. As a result, a dollar-based investor today can buy some of Europe’s strongest business franchises well below the prices these stocks fetched in the spring of 2010.

Like GE, Only Better
Headquartered in Amsterdam, Philips Electronics (NYSE: PHG) is Europe’s answer to General Electric (NYSE: GE)—without GE’s deadweight financial-services arm. PHG manufactures advanced medical devices, with a focus on diagnostics; lighting systems and components; consumer electronics (such as flat-screen TVs); and household appliances.

I expect PHG’s operating profits for 2010 to have hit an all-time high—GE please copy! Furthermore, while GE’s dividend (even after the recent hike) remains 55% below its 2009 peak, Philips never cut its payout during the recession and will likely sweeten it from 70 euro cents to 80 euro cents when the company declares its annual distribution next March.

At barely five times estimated 2011 cash flow, the stock is quoted at a yawning 40% discount to its average valuation for the past five years. Current yield, based on last year’s dividend: 3.1%.

[Band recently recommended a regional bank that’s rallied 12% since that article ran on Thanksgiving Day. In addition to Philips, he’s currently a fan of Total (NYSE: TOT), the French oil giant he calls “a real cheapie.” For more on Total’s charms, see Paul Tracy’s recent writeup—Editor.]

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